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Tuesday, February 12, 2013

New NHL CBA: The Changing Salary Floor & The Disincentive To Dress Young Players

By Fraser Blair

One
of the concepts that I wrote about in the first piece about the Tim Thomas
trade was the salary cap’s Lower Level (the salary floor). Under the new CBA,
the way teams will approach the Lower Level will be significantly different due
to 2 changes in the operating structure of the payroll range system.

First,
beginning in the 2014-2015 season the Upper and Lower Limits of the payroll
range (the cap floor and the ceiling) will no longer be calculated using the
current formula. The current formula adds or subtracts $8 million from the
salary midpoint in order to determine the Lower and Upper Levels. The salary
midpoint is determined by the following steps: (1) multiply hockey related
revenue (HRR) by the player’s share; (2) subtract player benefits from (1); (3)
divide the figure from (1) and (2) by the number of teams.

Midpoint =
[(HRR*0.50)-Benefits] / 30 teams

Note:
The previous formula also adjusted the midpoint upwards by 5% each season. The
NHLPA CBA summary mentions a growth factor but doesn’t specify the amount.

Last
season, the salary midpoint was roughly $56.3 million. As a result, the Upper
Limit was $64.3 million and the Lower Limit $44.3 million.

The
Upper and Lower Limits will still be calculated based on the cap midpoint under
the new formula, but those figures will be determined by adding or subtracting
15% instead of $8 million.

Regarding
the Lower Limit, the two systems would produce the same results if the salary
midpoint were $53.33 million. At all midpoints below, $8 million exceeds 15%.
Conversely, as the midpoint rises the cap floor is lower under the new formula
than it would be under the previous system.

This
appears to be a moderate victory for low revenue teams. Under the new CBA, the
Lower Level will be lower than it would have been under the previous system.
Furthermore, once the salary midpoint reaches $69 million, (likely between
years 6 and 7 of the CBA assuming 5% revenue growth) the difference between the
new and old formulas for calculating the Lower Level will be $2.35 million.
That’s not an insignificant amount of money, though I’m sure the owners of the
Florida Panthers and the New York Islanders would still tell you it’s too high.
They may be right, but that’s not the point here.

Although
the Lower Level won’t be increasing as much as it did in the past, the second
change to the Lower Level system will make it harder for teams to reach the
salary floor. According to the NHLPA summary, performance bonuses will no
longer count in the calculation of a team’s Lower Level. This provision was
featured for the first time in the NHLPA’s CBA proposal on October 17, 2012,
and it’s not surprising that the players fought for it its inclusion.

Since
2005, Clubs have been able to offer performance bonuses to certain types of
players. Performance bonuses are almost always offered to high draft picks and
free agents who sign and Entry Level Contract (ELC). Under the old CBA, teams
could offer up to $2.85 million in performance bonuses to players on their ELCs.
Those bonuses counted towards the calculation of the Club’s Upper and Lower
Level salary requirements but will no longer be counted towards the floor.

Performance
bonuses were governed by Exhibit 5 to the previous CBA, and were broken down
into two categories. The first category, Individual “A” Bonuses are linked to
individual player accomplishments. There are nine categories of “A” Bonuses for
forwards, ten for defencemen and eight for goalies. For skaters, the bonus
categories include Ice time, goals, assists, points, points per game,
plus-minus, blocked shots (defencemen only), selection to the All-Rookie team,
selection to the NHL All-Star Game, NHL All-Star Game MVP. For goalies, in
addition to the All-Rookie and All Star Game bonuses, the categories are Goals
Against Average, Save Percentage, Wins and Shutouts.

The
maximum value of any of these bonuses is $212,500, and a player cannot receive
more than $850,000 in cumulative Individual “A” Bonuses. In other words, the
ELC of a forward may contain $212,500 in bonuses for all nine categories, but
if he hits on more than four, he’ll only receive $850,000.

The
second category, Individual “B” Bonuses are bonuses payable in respect of
League Wide Awards and Performance. The “B” Bonus categories are also listed in
Exhibit 5 and the maximum value of any player’s “B” Bonuses in a single season
cannot exceed $2 million. However, the CBA allows teams to negotiate the
amounts payable individually with their players. For example, a most generous
ELC will entitle the player to a $2 million bonus upon any of the following:

• winning the Conn
Smythe trophy

• being named a 1st or
2nd Team All Star

• finishing, 5th in
balloting for the Hart, Norris, Selke, Richard or Vezina,

• finishing 10th in
scoring and/or

• finishing 10th in
points per game

***Note:
Individual
“B” bonuses in respect of winning the Calder Trophy ($212,500) and the Lady
Byng ($150,000) are also permitted, but Clubs may not negotiate bonuses in
excess of the stated amounts.

The
bonus requirements can and likely are more strenuous for most players, although
players like Justin Schultz who signed their ELCs as UFAs and players with a
realistic chance of playing in the KHL may have enough leverage to negotiate
better bonus packages. Even at the most generous end, it seems highly unlikely
that a player on his ELC would reach the full value of his Individual “B” Bonus
ceiling in each of his first three seasons.

I
spoke with prominent player agent Andrew Scott of Octagon and he corroborated
this theory for me. Mr. Scott told me that outside of the elite young players
(think Sydney Crosby, Evgeni Malkin and Alexander Ovechkin), players on their
ELC do not obtain the full value of their performance bonuses.

Given
this, it’s safe to say that Clubs in need of reaching the Lower Level were able
to gain a financial advantage under the old rules by, at least in part, writing
large and unreachable performance bonuses into their ELCs.

For
example, let’s take the case of Ryan Nugent-Hopkins of the Edmonton Oilers.
Nugent-Hopkins received the full range of Individual “A” and “B” bonuses and
we’ll assume for the sake or erring on the conservative side that he obtained
the full permissible bonus for each category. We’ll consider the Individual “A”
bonuses first.

Ryan
Nugent-Hopkins: 2012 Statistics

Games

Goals

Assists

PPG

+/-

ATOI/EDM Forwards

All Rookie

All Star

All Star MVP

62

18

34

0.84

-3

4th

Yes

Yes

No

Nugent-Hopkins
qualified for the PPG bonus, the ice time bonus, the All Rookie Bonus and the
All Star Bonus. As a result, the maximum he would have received in Individual
“A” bonuses last season was $850,000 As a result of not scoring 20 goals,
notching 35 assists, finishing amongst the top-3 forwards in plus/minus or
winning the MVP of the All Star game, Nugent-Hopkins did not qualify for those
bonuses.

Turning
to the Individual “B” bonuses, Nugent-Hopkins won the Calder Trophy and we’ll
assume that the Oilers paid him a bonus of $212,500 for that trophy. He did not
qualify for any of the other “B” bonus categories.

In
sum, the most Nugent-Hopkins could have earned from Individual “A” and “B”
bonuses in 2012 was $1,062,500. When we add in his salary ($925,000) and his
signing bonus ($92,500), we get a maximum total value of $2,080,000. That
figure is $1,695,000 below his cap hit.

This
is already getting to be a long piece, so I’m not going to go through the other
Oilers currently playing under ELCs (though it’s important to note that Jordan
Eberle likely qualified for all of his $312,500 performance bonus money). However,
it would appear to be the case that outside of the elite players alluded to by
Mr. Scott, players on their ELCs do not hit on the full range of available
performance bonuses.

With
each of the last three first overall picks and Justin Schultz on their roster,
the Oilers are probably the extreme end of the bonus spectrum. But the point
here is that some teams have been able to gain a financial advantage through
the performance bonus system by tying largely unreachable bonuses to ELCs.

Looking
ahead to next year, the Edmonton Oilers’ cap hit of $44.5 million contains
about $8.5 million for performance bonuses. With at least 7 roster spots to
fill, the Oilers won’t have trouble reaching the floor.

The
New York Islanders, on the other hand, will be an interesting club to monitor
next season. With $29 million committed to 12 players, the Islanders will have
to spread the remaining $15 million amongst the 9 (or so) roster spots
available. Again, it’s not that this amount will be difficult to fill, but they
won’t be able to rely on their prospects to carry the cap load the way the
Oilers have in the past. Under the old rules, the cap hits of several near-NHL
ready prospects like Griffin Reinhart (bonus: $2.35M), Brock Nelson (bonus:
$1.925M), Nino Neiderreiter (bonus: $1.925M), Ryan Strome (bonus: $850,000)
Mike Halmo (bonus: $850,000) and Calvin de Haan (bonus: $600,000), would have
totaled $13.8 million. Under the new regime, the maximum value of those players
relative to the Lower Level is only $5.3 million.

General
Manager Garth Snow will have to walk the difficult line of ensuring a sound
development for his Club’s prospects and making sure he reaches the floor.
Perhaps this indicates that the trade for Tim Thomas was made for the purpose
of reaching next season’s Lower Level. f Snow can slide Thomas’ contract to
next season because of his suspension (which he will likely try to do) and
avoid an NHLPA grievance for cap circumvention (which will form the subject of
Part 2 of my Tim Thomas series), then he’s a lot closer to the Lower Level.

In
conclusion, this is a bad provision for the fans who will have to wait longer
in some cases to see their team’s top prospects wear an NHL uniform. There just
isn’t the same business (non-hockey) incentive for floor teams to dress their
young players as there used to be.

On the other hand, this was a really shrewd
inclusion by the NHLPA. The likely result is that floor teams will have to
spend more money on veteran players in order to reach the lower limit.

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About Me

A lawyer and partner at a law firm, Eric is the TSN Legal Analyst, writes for Forbes and contributes to CBS, ESPN, Sirius XM, CTV and NBC. He is also the host of the radio show Offside, that looks at the business and law of sports. The show airs on TSN 1200 Ottawa and TSN 1260 Edmonton. Eric would like to meet the following people: Markie Post, Alan Thicke, Tony Danza, Bob Saget, Bronson Pinchot, the Littlest Hobo, Joannie (but not Chachi) and Mary Kate (but not Ashley). Eric's photo was heavily airbrushed.